Today’s Blog – Tuesday 24th January 2017

Yesterday we concluded that the potential imminent threats to Australian LNG from a Trump induced regulatory unfreezing over US gas production was grossly overblown. Overnight this view got some indirect support from a Forbes article authored by well-known US industry commentator Art Berman.

The article indicated that all of the US’s shale gas basins are in production decline at present – in our view almost wholly due to economics and geology, not Federal regulation. As we noted, State opposition to the development of the Marcellus (the lowest cost and most important US shale Basin) in the likes of wealthy New York State (with very little Federal lands therein) will not change because of what happens in Washington.

Berman concluded that US gas prices will rise to ~US$4 in 2017 – and in future could well go considerably higher as the current decline rates will require a very large turn-around in terms of capex and rig numbers.

Commodity prices

Crude prices fell slightly overnight, with Brent down ~0.3% to US$55.31 and WTI down ~0.8% to US$52.79. Concern about Friday’s rig count numbers overcame news from an OPEC gathering in Vienna that on Sunday reported good progress on production cuts (no doubt Baker Hughes’ numbers are more reliable than the potential “alternative” facts from OPEC members and Russia).

Henry Hub was up ~2% to US$3.26 (was the market listening to Berman – his profile has risen in recent years?).

Our favourite “alternative” facts in the oil market today are that the crude price rose to US150 overnight, your blogster has just been hired as CEO of Santos at A$5M per annum but unfortunately blogging services will finish today.

LNG and international gas

A recent Bloomberg story illustrated a key competitive threat from the US to other LNG players (that in the short term at least) is not regulatory related.

This concerned Toshiba’s take-or-pay contracts for liquefaction capacity due to come on line in Texas later this year – which is not backed up by offtake contracts. Payments for that capacity are sunk and Toshiba may be forced to sell LNG at prices down to its marginal cost – basically the Henry Hub linked purchase price. That is competitive anywhere in the world.

Korea has just imported its first gas from the US – as we noted recently, high Asian LNG spot prices have provided excellent arbitrage opportunities for US gas.

The Australian Financial Review (AFR) today contained yet another story alluding to the potential to import LNG into East Coast Australia using a Floating Storage and Regasification Unit (FSRU). The newspaper reported that BHP was investigating the concept – presumably for gas for a new gas-fired power station for Olympic Dam in South Australia. This mine suffered from an electricity black-out last year when processing operations had to be halted and fired back-up – with some risks to the plant and considerable cost imposts.

BHP presumably knows that a gas-fired power plant is not guaranteed in itself to be 100% reliable and this news may represent a negotiating position with other energy suppliers – and the Government over potential “support”.

Quote of the day

Saudi Aramco’s CEO Amin Nasser at Davos last week:

“$25 trillion will need to be invested over the 25 years on new oil capacity to meet rising demand”.